Finance
Following Conventional Wisdom Could Cause This Fatal Million Dollar Mistake
Conventional Wisdom States Buy a House Get a Fixed Rate Mortgage and Make Extra Payments to Pay Your Mortgage off as Fast as Possible. If you follow Conventional Wisdom you will be making a Million Dollar Mistake. Keep Reading to find out why.
(This Example is Similar to one Used By Ric Edelman in his New York Times Best Seller the Rules of Money)
You have a good job and you decide it is time to buy your first home. You find the Perfect Home in the Perfect Neighborhood. It is a $200,000 Home. If You follow Conventional Wisdom you will purchase that $200,000 Home with 20% Down. You will get a 15 Year Fixed Rate Mortgage at 5.25%. Your Monthly payment would be $1286 a Month and you pay an Extra $100 so you can pay off your Mortgage Early.
The Unconventional way Get a 30 Year Interest only mortgage (Interest Only for first 15 Years then Fully Amortized over last 15 Years) with a 5% Down Payment. Your Monthly Payments are $970 all of which is Tax Deductible and you have $30,000 leftover to invest. (The rest of this Example assumes you will invest your After Tax Savings and the $30,000 at 8%)
At the end of 15 Years Using the Conventional Method your House would be paid off and you would have almost $28,000 in Savings and Investments. (Remember you paid an Extra $100 a Month to pay off your mortgage Faster. You are now Investing your Total Monthly Mortgage Payment plus that $100 at 8%)
At the end of 15 Years with the Unconventional Method you would still owe $190,000 on your house but you would have over $300,000 in savings and Investments. (Enough to Pay off your Mortgage if you want too and still have over $110,000 in your Pocket)
At the End of 30 Years using the conventional method you would owe your home free and Clear and you would have slightly over $570,000 in savings and investment. You would have saved almost 21,000 in Taxes
At the End of 30 Years using the Using the Unconventional method you would own your home free and clear and have slightly over $1,220,000 in savings an Investment. You would have saved over $88,000 in Taxes.
Let's Assume that the $570,000 and $1,220,000 Continue to Remain Invested at 8%. In 5 Years the $570,000 Would Grow to just under 838,000 the $1,220,000 Would Grow to Just Under $1,793,000. A Difference of Almost $1,000,000. In 5 More Years the Difference would grow to over $1,400,00. By Listening to conventional wisdom you have now lost well over $1,000,000 Dollars
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Mike Makler
Tags: Mortgage, Fix Rate, Interest Only, InvestmentSimilar articles
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